Middle Market Growth - March/April 2016

Growth MIDDLE MARKET

// MARCH/APRIL 2016

PHELPS INDUSTRIES LEADING THE PACK

IN THE REAL-WORLD GAME OF CYBERSECURITY, THE BEST DEFENSE IS A GOOD OFFENSE A QUALIFIED OPINION: CAROL FRANK, MANAGING DIRECTOR, MHT MIDSPAN

The official publication of

Challenging the status quo in Private Equity.

With more than 25 years experience in PE markets worldwide, Dentons’ Private Equity team advises fund sponsors and their portfolio companies on all aspects of their business, including fund formation, M&A and financing transactions, tax and regulatory matters.

Dentons and 大成 have combined. Together we form the world’s largest global elite law firm.* Contact: Paul Gajer Partner, New York T +1 212 398 5293 paul.gajer@dentons.com Steve Rist Partner, Kansas City T +1 816 460 2645 steve.rist@dentons.com Michael (Mick) J. Cochran Partner, Atlanta T +1 404 527 8375 michael.cochran@dentons.com

dentons.com © 2015 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. Please see dentons.com for Legal Notices. *Acritas Global Elite Law Firm Brand Index 2013-2015.

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EXECUTIVE SUMMARY RICHARD P. JAFFE // Chairman, ACG Global and Partner, Duane Morris LLP

Unleashing Opportunity in the Pet Sector

H

ow many of you recognize the slogan “His Master’s Voice?”

Beginning at the turn of the 20th century, it ran under

Victrola’s trademark image of a terrier listening to the sound

coming from a newfangled recording device known as a phonograph.

Even now, it still promotes some RCA-branded electronics.

It’s unlikely launching such a slogan today would be well-received.

Humans have developed sophisticated relationships with their pets that transcend the master and subject dynamic. Instead, dogs and cats are revered as family members, having moved progressively from the barn to the backyard and finally the house. Humans spend extraordinary sums on their fuzzy, four-legged family members.

According to the American Pet Products Association, the size of the pet industry market reached nearly $61 billion in 2015, almost double its $36 billion size just 10 years ago.

As such, more companies are recognizing that pet products and services represent a significant opportunity for businesses ranging from food manufacturers to boarding and grooming facilities.

Private equity firms such as Wafra Partners of New York have also tuned in. Wafra’s purchase of Wayland, Massachusetts-based pet treats manufacturer Phelps Industries is the focus of our cover story, showing how quickly the industry is changing and what it takes to enter and keep up. Find out more about deals in this space from Carol Frank, an investment banker specializing in pet product-related deals, in A Qualified Opinion.

We also take a close look at cybersecurity, a topic that’s top of mind for PE firms, LPs and portfolio companies, in a series featuring practical advice for reining in online risk. Our first segment, which tackles how to identify your firm’s exposure to cyberrisk, appears in this issue. In addition, we’re providing monthly columns from ACG’s cyberadvisers—Richard Schroth, Ph.D, and Israel Martinez—on our website, middlemarketgrowth.org.

For more news you can use, check out the policy section for ACG’s perspective on a new reporting template from the Institutional Limited Partners Association, and an update on a forthcoming private equity compliance manual.

And while we don’t allow pets at this year’s InterGrowth, we hope that will not stop you from joining us in New Orleans on May 2-4. We’ll have a full lineup of networking and education against the backdrop of one of the country’s most musical and unique cities. Bet you’ll find some old phonographs there! //

MIDPOINTS JOHN GABBERT // Founder and CEO, PitchBook

No More Domestic Doldrums

E

veryday life has changed dramatically in the last decade, a shift driven in no small part by the smartphone. Less than 10 years ago, all the tasks we now use smartphones for would have been

unimaginable. Managing communication on the go, watching videos and listening to music in high-definition audio, connecting to televisions and sharing screens—these are just some of the many capabilities we take for granted.

Our phones have transformed our lives, but they pale in comparison to what’s coming next. We’ll move beyond using mobile devices to manage streams of information whenever and wherever we want. Our con-

BIO // As founder and CEO of PitchBook Data Ltd., John Gabbert brings more than 15 years of experience building comprehensive databases that cater to the private equity and venture capital industry. Gabbert is recognized as an industry leader.

He built the PitchBook Platform from the ground up and grew the company into the foremost data and technology provider for the global PE and VC markets.

nected devices will manage that information flow independently. Beyond that, connected devices and smartphones will develop niche use cases, with additional capabilities for particular user groups.

I was recently looking through the PitchBook Platform at data sets of U.S. companies in the consumer products and information technology space within the Internet of Things, or IoT, vertical. (Used here, IoT refers to devices linked through wired and wireless networks via Internet-like protocols.) According to data from PitchBook, there were 220 venture financings for a total of nearly $940 million in 2015 alone. One of the recently funded companies that caught my eye was Eero, a startup that makes Wi-Fi and Bluetooth-capable wireless routers to plug into every outlet in your home. This company’s offering is one example of the next-

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gen products that will transform domestic life even further.

Another company that stood out was August Home. It offers an array of smart products for users to make virtual keys for guests, enabling temporary access to their homes, as well as a remote surveillance camera for security. Along with Nest Labs, which makes similar products, August is a good example of how using current technology in new ways can make everyday tasks more convenient.

Continued on next page

MIDPOINTS JOHN GABBERT // Founder and CEO, PitchBook “CUTTING-EDGE TECHNOLOGY PRESENTS A GREAT PROFIT OPPORTUNITY FOR PLAYERS OF ALL SIZES.”

Other advances in this arena include monitoring the energy consumption of our devices. Services that scan the contents of our refrigerator, freezer or cupboard aren’t far away either. We’ll soon likely have a network of home devices that communicate constantly with each other, ordering groceries from AmazonFresh if the fridge is looking bare, turning off lights when you leave a room, opening the garage door as your car turns into the driveway, and more.

One of the more immediate, promising applications of technology is to help aging baby boomers. As the generation grows older, the number of people with increased health care needs will only rise. Improved remote monitoring systems could help families keep track of their loved ones and reduce response times in emergencies. When it comes to in-home care, smart robotic appliances could help elderly retirees who are still relatively independent but need some level of assistance. Smart home management systems could connect with robotic assistants to handle simple heavy lifting. Sensors in the bathroom and bedroom could monitor sleeping activity, among other health indicators.

Cutting-edge technology presents a great profit opportunity for players of all sizes, particularly manufacturers that can leapfrog competitors by capitalizing on particular consumer niches. When it comes to the intersection of IoT and manufacturing, much of the focus has been on how lean manufacturers will operate using additive processes, and how much more efficiency can be achieved via cyber-physical systems.

But even without the implementation of those processes, manufacturers can anticipate the demands of an increasingly connected world. They should plan accordingly by building out supply chains, revamping production processes and targeting new products. It’s the next big wave, the next industrial revolution, so getting out ahead to surf it will be crucial. //

Strength, solutions and strategic growth for private equity Audit | Tax | Advisory | grantthornton.com

“Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers to the brand under which the independent network of GTIL member firms provide services to their clients, as the context requires. GTIL and each of its member firms are not a worldwide partnership and are not liable for one another’s acts or omissions. In the United States, visit grantthornton.com for details. © 2016 Grant Thornton LLP | All rights reserved | U.S. member firm of Grant Thornton International Ltd

Growth MIDDLE MARKET

// MARCH/APRIL 2016

ON THE COVER: Daniel Trott, CEO, Phelps Industries Cover and above photo by Steve Puppe

FEATURES

Phelps Industries: Leading The Pack Wakefield, Massachusetts-based Phelps Industries has been in the pet food game since 1966, but with backing from Wafra Partners, it has undergone a modern facelift, producing more customizable pet treats with all-natural ingredients to appeal to increasingly health-conscious owners.

Read more.

“CUSTOMERS ARE CLAMORING FOR NEW IDEAS AND PRODUCTS, EVEN NEW PACKAGING.” // RYAN WIERCK, MANAGING DIRECTOR, WAFRA PARTNERS

The Game of Cybersecurity The best defense is a good offense as attacks on midsize companies and private equity firms become more common.

Read more.

TABLE OF CONTENTS

IN THIS ISSUE

PRESIDENT & CEO Gary LaBranche, FASAE, CAE glabranche@acg.org

Executive Summary

VICE PRESIDENT, COMMUNICATIONS & MARKETING

MidPoints

by John Gabbert Growth Economy

DEPARTMENTS

Face-to-Face

POLICY POINTS

Quick Takes

• PE Regulatory Compliance Guide Coming Soon

B-Side

• ACG Weighs in on ILPA Fee Reporting Template

The Ladder It’s the Small Things

• SEC Report Confirms PE Funds’ Low Systemic Risk Read more.

The Leadership

THE ROUND • Golden Year for M&A with More to Come

READ ONLINE Read additional content on the MMG website.

• Everyday Investors Will Soon Help to Fund Growth Companies

2014 Association TRENDS All-Media Silver Award, Monthly Trade Publication 2014 Folio Eddie Digital Winner, Standalone Digital Magazine 2014 Apex Award, New Magazine, Journal & Tabloid

EDITOR-IN-CHIEF Deborah L. Cohen dcohen@acg.org

ASSOCIATE EDITOR Kathryn Mulligan kmulligan@acg.org

DIRECTOR, COMMUNICATIONS & MARKETING Larry Guthrie lguthrie@acg.org

• The Need to Re-Engage Workers Is Real—PwC Study • ACG’s Landis and Members Named ‘Most Influential Women’ in M&A Read more.

A QUALIFIED OPINION

2015 Folio Ozzie Digital Winner, Standalone Digital Magazine

Kristin Gomez kgomez@acg.org

VICE PRESIDENT, EVENTS & PARTNERSHIPS Christine Melendes, CAE cmelendes@acg.org

Carol Frank, Managing Director of MHT MidSpan, Looks at the Investment Environment in the Pet Products and Services Industry.

Read more.

DIRECTOR, STRATEGIC DEVELOPMENT

ACG@WORK

Custom media services provided by Network Media Partners, Inc.

• Pitch Perfect: ACG New York’s Deal Tank Returns • Fraud in China—War Stories from the Trenches • Speaker Lineup Draws Record Attendance • ACG Orange County Private Equity Night • ACG Chapters of the Year Announced Read more.

THE PORTFOLIO The latest middle-market trends and thought leadership written exclusively by a team of expert ACG Global featured firms.

Read more.

Maggie Endres mendres@acg.org

Association for Corporate Growth 125 South Wacker Drive, Suite 3100 Chicago, IL 60606 ACG Membership: membership@acg.org www.acg.org Copyright 2016 Middle Market Growth®, InterGrowth® and the Association for Corporate Growth, Inc. All rights reserved.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

PUBLIC POLICY UPDATE POLICY POINT NEWS

1

PE Regulatory Compliance Guide Coming Soon

PE Regulatory Compliance Guide Coming Soon

By Amber Landis

2

ACG Weighs in on ILPA Fee Reporting Template

If new SEC regulations under Dodd-Frank are giving your compliance team a headache, fear not: There’s a solution underway that promises relief.

A new publication on regulatory compliance for private equity firms is forthcoming. Published by Thompson Information Services, the “Guide

3

SEC Report Confirms PE Funds’ Low Systemic Risk

to Private Equity Regulatory Compliance” will assist middle-market private equity compliance officers, financial officers, in-house legal counsel, and legal and accounting advisers to address their many compliance and regulatory challenges.

The guide will cover a broad range of compliance and regulatory issues under federal and state law, including hot-button topics such as the allocation of fees and expenses, co-investments and cybersecurity. The guide is designed as a pragmatic, user-friendly document for attorneys and nonlegal users alike.

Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET “Over the past few years, the SEC has really focused on issues that arise out of a private equity firm’s fiduciary duty to its clients,” said Scott Gluck, special counsel with global law firm Duane Morris and editor of the guide. “We want to make sure the guide addresses these points in a user-friendly way and covers more than just the statute.”

Several notable ACG partners and member-firms are contributing content to the manual, including Duane Morris, Venable, RSM (formerly McGladrey), Pepper Hamilton, The River-

Amber Landis

side Company and Winston & Strawn.

ACG has taken steps to address regulatory issues relevant to middle-market private equity firms. In 2014, the association formed its Private Equity Regulatory Task Force, known as PERT, which actively engages with the Securities and Exchange Commission and is in the process of developing suggested industry-wide best practices.

The compliance guide will be featured at ACG’s annual InterGrowth conference in New Orleans, May 2-4, 2016. // If you have questions or comments, please contact Amber Landis, ACG Global vice president of public policy.

READ ONLINE // Find updates and insight on policy issues on the MMG website.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

ACG Weighs in on ILPA Fee Reporting Template

By Kathryn Mulligan The Institutional Limited Partners Association in January released the first version of its fee reporting template. After careful review, ACG responded with a statement saying it would favor additional changes before providing an endorsement.

ILPA, a membership organization representing private equity limited partners, designed the fee reporting template to “unify and codify the presentation of fees, expenses and carried interest information by fund managers to limited partners,” according to its Jan. 29 press release.

Responding to the launch of the template, ACG Global President and CEO Gary LaBranche, FASAE, CAE, said the association is “encouraged that a portion of (ACG’s) proposed changes to the template were considered and ultimately included in the template.”

However, LaBranche added, “ACG cannot endorse the template at this time, due to the fact that, among other matters, the definitions of requested information are ambiguous, thus making accurate comparison of data impossible.”

Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET ACG in December provided comments to ILPA on its draft template, expressing concern that the proposed document would require private equity general partners to provide a broad range of information. ACG cautioned that some of that information may not be applicable for small and midsize fund managers and could require additional accounting systems or tools.

ACG noted in its comments that the time required to complete the information requested on the template may present a substantial burden to smaller fund managers; it recommended that ILPA adopt a more targeted approach focused on the information that limited partners value most.

The template is tied to ILPA’s stated mission of increasing transparency between GPs and LPs and aligning the interests of the two groups.

Like ILPA, ACG has taken steps to increase transparency between private equity funds and their investors. The ACG Private Equity Regulatory Task Force, known as PERT—a group of chief compliance officers, chief financial officers and in-house counsel to middlemarket private equity firms—has formed a subgroup to focus on the issue of fees and expenses. The group is working to develop best practices to improve transparency and disclosure of manager compensation, shared services and portfolio company expenses.

With the help of PERT, ACG plans to work with ILPA to revise the template in a way that will provide clear and consistent information to investors. // To learn more about the Private Equity Regulatory Task Force and ACG’s other public policy initiatives, contact Amber Landis, ACG Global vice president of public policy.

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET

SEC Report Confirms PE Funds’ Low Systemic Risk

By Deborah L. Cohen A new report from the Securities and Exchange Commission confirms that private equity funds pose no systemic risk to the U.S. financial system.

The use of derivatives by private equity funds is dramatically less than hedge funds, according to the SEC, which released its first “Private Funds Statistics” report in October of last year. In the fourth quarter of 2014, PE funds reporting data to the SEC held, in aggregate, $66 billion in derivatives, just a fraction of the $14.59 trillion held by hedge funds.

Similarly, the average derivative holdings of private equity firms made up merely 3.8 percent of their aggregate net asset value, compared with 429.3 percent for hedge funds. More importantly, a significant portion of the derivatives used by private equity firms are designed to hedge risk rather than for speculative purposes. Hedge funds, on the other hand, frequently use derivatives such as swaps, futures and related instruments for speculative purposes.

Continued on next page

POLICY POINTS THE LATEST PUBLIC POLICY ISSUES IMPACTING THE MIDDLE MARKET In addition, private equity funds were significantly less leveraged than hedge funds, employing leverage of just 4 percent of their gross asset values. Hedge funds reported leverage of nearly 36 percent in the fourth quarter of 2014, the most recent period for which data are available.

“The SEC data confirm what ACG members have known all along. Private equity funds do not use derivatives in any significant way,” said ACG Global President and CEO Gary LaBranche, FASAE, CAE. “There is no systemic risk associated with private equity investment.”

The publication of the data, which were compiled by the SEC Division of Investment Management’s Risk and Examinations Office, marks the first time the agency has released comprehensive information on private investment funds. The SEC collected the data through Form PF and Form ADV filings, which covered a two-year period beginning in the first quarter of 2013.

In the fourth quarter of 2014, 8,407 private equity funds were represented in the SEC data, compared with 8,635 hedge funds. Also providing data were other private funds, real estate funds and venture capital funds, among others.

The SEC cautioned that use of Form PF is still “a relatively new reporting requirement for advisers to private funds,” and as such, the agency “staff continues to work with the data and filers to identify and correct filing errors.” //

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H ®.

To d a y ’s f a s t - p a c e d m a r k e t r e q u i r e s a n e d g e . A C G G l o b a l P a r t n e r s provide yo u with the exper tis e and bes t prac tices needed to c l o s e t h e d e a l.

L E A R N M O R E A B O U T A C G PA R T N E R S H I P S , V I S I T A C G . O R G / PA R T N E R S H I P S © 2016 Association for Corporate Growth. All Rights Reserved.

GROWTH ECONOMY THE IMPACT OF MIDDLE-MARKET PRIVATE EQUITY

NEW YORK // 1995-2013 New York has seen tremendous jobs and sales growth driven by private equity-backed middlemarket businesses, including a jobs growth rate more than six times that of all businesses in the state between 1995 and 2013.

+100+T

91.7%

111%

JOBS GROWTH IN PE-BACKED BUSINESSES

NY

14%

SALES GROWTH IN PE-BACKED BUSINESSES

JOBS GROWTH IN ALL BUSINESSES

14.5%

57,711

ACG NEW YORK

JOBS CREATED

BY PE-BACKED BUSINESSES

See the impact of middle-market private equity on your state at GrowthEconomy.org.

JOBS GROWTH % BY SEGMENT

SALES GROWTH % BY SEGMENT

30.8%

MM Seg 1: $10-50M in sales

20.7%

MM Seg 2: $50-100M in sales

11.6%

12.3%

KEY Small: Less than $10M in sales

7.1%

12.8%

35.5%

42.9% 1.2%

SALES GROWTH IN ALL BUSINESSES

25%

MM Seg 3: $100M-1B in sales Large: More than $1B in sales

All stats are from PitchBook and the Business Dynamics Research Consortium at the University of Wisconsin-Extension.

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

REGISTER // For a complete schedule, attendee list, and to register, visit intergrowth.org.

Big Deals in the Big Easy For more than 40 years, middle-market professionals from across the globe have made the annual trip to ACG’s InterGrowth conference, an event they rely on as an essential source of networking and deal flow. This year’s event will be held at the Hyatt Regency in New Orleans on May 2-4. According to data from PitchBook: • InterGrowth attendees consistently account for one-third of total U.S. PE deals.

• InterGrowth 2015 attendees represent $103 billion of investable capital.

• InterGrowth 2015 attendees deployed nearly $20 billion in Q1 2015 alone.

Over three days, attendees will take part in numerous networking events with top M&A deal-makers, interface with capital providers during ACG Capital Connection®, and hear from renowned industry experts who can shed light on the latest financial trends. This year’s keynote presentations include: • The Battle for the White House: Political Pundits Debate the 2016 Election, featuring David Axelrod, senior political analyst for NBC News and MSNBC, and former senior adviser to President Barack Obama; and Ana Navarro, Republican strategist and political analyst for CNN and CNN en Español.

• From Hal to Now: The Future of AI, Robotics and Biotech, featuring leading futurists Neil Jacobstein and Raymond McCauley of Singularity University. //

FACE-TO-FACE CONNECT TO YOUR NEXT DEAL

CHAPTER EVENTS Get involved! This spring, ACG chapters across the globe will host hundreds of local events. Check out what’s happening at your local chapter, register and join in on valuable educational and networking opportunities.

ACG Columbus Holiday Party at the Franklin Park Conservatory Left: Karen Davis of Green Oak Advisors with Dennis Mowrey of Schneider Downs & Co. Right: Attendees mingle on the terrace of the conservatory.

ACG British Columbia Chapter

ACG Minnesota Chapter

ACG Chicago Chapter

ACG National Capital Chapter

ACG Cincinnati Chapter

ACG New York Chapter

ACG Denver Chapter

ACG Orange County Chapter

ACG Detroit Chapter

ACG Raleigh Durham Chapter

ACG Los Angeles Chapter

ACG Richmond Chapter

ACG Maryland Chapter

ACG San Francisco Chapter

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Had a newsworthy chapter event?

Send a 150to 200-word summary and high-resolution photos to Associate Editor Kathryn Mulligan.

THE ROUND NEWS THAT MATTERS M&A OUTLOOK 2016

Golden Year for M&A with More to Come

By Raconteur The total value of global merger and acquisition activity hit a record high of $4.2 trillion in 2015. Such has been the deal bonanza in a host of sectors, from pharmaceuticals and telecoms to oil and gas, that last year surpassed the all-time annual record for global dealmaking set in 2007, according to Thomson Reuters. The global information group added that since records began in 1980, only six transactions have surpassed the $100 billion mark, and two of these were announced in 2015 alone.

With low interest rate environments and cheap financing persisting in many economies, many believe this surge in M&A dealmaking will only continue to increase throughout 2016.

However, history and hindsight have long shown that M&A can sometimes be a foolhardy pursuit, damaging once-healthy companies and leading to the destruction of shareholder value.

In every sector there are examples of M&A transactions where companies have overpaid, failed to properly integrate or taken on so much debt that it crippled operational flexibility. As the M&A industry moves further into this new year, the questions that need to be asked now are whether this is an advantageous time to invest, or whether companies and their banking advisers should tread with caution.

These trends and more are addressed in “M&A Outlook 2016,� published in partnership with ACG. The 16-page report empowers business leaders with thought-leading analysis into the evolving M&A landscape and features high-impact data visualizations and immersive editorial from award-winning journalists. The publication serves as a fundamental compendium to the current state of M&A, exploring recent mega-deals, business valuations, tensions in private equity and due diligence. // —Raconteur is a publishing house and content marketing agency that produces special reports for The Times and The Sunday Times, as well as content marketing solutions for brands and bespoke market research.

THE ROUND NEWS THAT MATTERS

Everyday Investors Will Soon Help to Fund Growth Companies Equity crowdfunding will now be permitted as a form of financing for U.S. companies, beginning in mid-May. The SEC ruled 3-1 in October to give the nod to rules about crowdfunding originally contained in the 2012 Jobs Act. The new regulations allow small businesses to raise up to $1 million per year from the general public using online fundraising platforms, such as Kickstarter, among others. Rules prior to this time limited investment to so-called accredited investors, or those individuals with a net worth of at least $1 million or annual income of at least $200,000.

“These offerings can be made either via existing broker-dealers, or via a new class of regulated registrants called ‘funding portals,’” wrote Fortune. “These portals … would be required to provide adequate investor information and conduct background checks on issuers, their executives and their officers.”

Those companies raising between $500,000 and $1 million will be required to have their finances reviewed by an outside accounting firm. //

THE ROUND NEWS THAT MATTERS

The Need to Re-Engage Workers Is Real—PwC Study Employee engagement is falling short of the mark at organizations of all sizes, despite the best efforts of companies to keep workers tuned in, a new study from PwC found.

Even so, companies that actively manage their employees’ engagement have a “promising outlook” for improvement. Those companies with significantly higher performance conduct regular employee surveys and follow up on what they reveal, PwC said in its report, “2015 Employee Engagement Landscape Study: Championing Greatness or Capturing Mediocrity.”

“These findings suggest that when done right, employees feel excitement about their companies’ future, their part in creating that success, and a genuine connection to their leaders, managers and the work itself,” the report said, adding: “But not all engagement (or disengagement) is the same or should be managed in the same way.”

Among the report’s findings: • Engagement is trending down, but people aren’t necessarily leaving. Engagement levels fell to 66 percent from 62 percent in 2013, but intent to stay at the organization was relatively flat, at 73 percent from 74 percent two years earlier.

• Companies that survey workers have significantly higher levels of engagement.

Engagement at companies that survey employees stood at 70 percent compared with 53 percent at firms that don’t.

• Employee engagement levels fall into four categories: Champions are highly motivated performers; tenants are energized and motivated but less committed to staying than champions; captives show lower levels of engagement but don’t necessarily wish to leave; and finally, disconnected employees are not motivated to contribute or stay, PwC found.

The study—released in November—relied on responses from nearly 7,400 respondents, the majority of which worked for companies in the United States. //

THE ROUND NEWS THAT MATTERS

GO ONLINE// Listen to interviews with two of the women on the list, Mary Josephs and Jeri Harman.

Amber Landis

Pam Hendrickson

Karin Kovacic

Gretchen Perkins

ACG’s Landis and Members Named ‘Most Influential Women’ in M&A The Association for Corporate Growth’s Amber Landis was named one of the 25 Most Influential Women in Mid-Market M&A in a special report published by Mergers & Acquisitions magazine.

Alongside Landis, ACG Global’s vice president of public policy, M&A’s December report included a number of ACG leaders, members and other powerful women in the industry.

The list included Pam Hendrickson, COO of the Riverside Company and a former chairman of the ACG Global board of directors, along with two current members of the board—Karin Kovacic, vice president of Alcentra Corp., and Gretchen Perkins, partner with Huron Capital Partners.

M&A noted Landis’ efforts lobbying in Washington, D.C., for policies favorable to middlemarket companies. Landis joined the association in 2013 and is its first registered lobbyist.

In October, she opened ACG’s first D.C.-based office.

M&A cited the progress women have made in the financial services sector, even as they continue to be underrepresented, as the impetus for its report.

“With this project, we hope to foster a sense of community and inspire the next generation,” the report’s authors wrote on the M&A site. //

THE ROUND NEWS THAT MATTERS

U.K.-based veterinary group CVS Group is among the most active corporate consolidators for pet-related services; in 2015 it bought The Pet Crematorium and veterinary care center Albavet.

6

$

VERTICAL VIEW // PET PROJECTS The J.M. Smucker Company showed corporate America’s interest in the pet sector when it bought animal food- and snacks-maker Big Heart Pet Brands in 2015 in a $6 billion deal.

BILLION

Topping the list of large pet-related transactions was the $8.7 billion takeprivate acquisition of retailer PetSmart by a group of investors led by BC Partners.

24.2

$

8.7

$

BILLION

BILLION

Pet care-related acquisitions have skyrocketed in the last few years, with annual aggregate deal value rising to $24.2 billion in 2015 from $13.9 billion the year prior.

The number of deals completed in the pet care sector has nearly doubled since 2013, rising to 21 last year from just 11.

Last May, Mistral Equity Partners-backed pet-products manufacturer Worldwise merged with Quaker Pet Group, a maker of dog toys and pet carriers, to operate on the Worldwise platform, illustrating the trend toward consolidation in the industry.

All stats are from PitchBook.

Private equity is betting on the pet sector, as firms like The Halifax Group, The Riverside Company and Swander Pace Capital have proven by committing capital in this space.

21 DEALS

“I think rolling up these (pet product) companies is the only way to keep up with online sellers. I was surprised to see they’re still mostly physical retailers, at least in the middle market.”

—Chelsea Harris, data analyst, PitchBook

P A R T N E R S I N D R I V I N G M I D D L E - M A R K E T G R O W T H .ÂŽ Yo u on

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transactions, regulatory

as

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A legacy pet food maker gets a modern facelift.

Phelps Industries

Leading the Pack

BY SUSAN NADEAU

Photos by Alyssa Schukar

The strategic team (from left): Ryan Wierck, Tedd Ellis, Daniel Trott and Jeffrey Gerson.

PHELPS INDUSTRIES // Business: Wakefield, Massachusetts, manufacturer of private-label pet treats Ownership: Wafra Partners took a majority interest in Phelps in December 2012 Challenge: Find a way to cash in on the changing nature of pet care, as millennials and others seek more upscale food choices for their dogs Strategy: Offer more product customization; introduce new formulations with ingredients such as exotic meats and healthy ingredients like kale; develop proprietary brand; and boost partnerships

W

hen Dave Ratner’s son talked about adding pet treats to his quirky “I’d Rather Be With My Dog” online store of t-shirts, phone cases and other cool stuff, Ratner—himself the owner of a pet food company—had doubts. His son suggested not just any dog treats, but treats conforming to the increasingly popular paleo diet, which restricts followers to foods such as lean meats, nuts, fruits and vegetables.

But when Ratner brought it up with an executive from dog treat manufacturer Phelps Industries LLC at a pet supply trade show, the executive loved the idea.

“You can’t have grains, can’t have dairy, can’t have this, can’t have that—it took us a good while to get the formulas right,” says Ratner, who provides financial support to his son’s business. “It was sort of a pain in the neck to get the paleo done, but Phelps did it.”

Now, sales of “I’d Rather Be With My Dog” paleo dog treats, manufactured by Phelps, have taken off. Ratner’s son recently signed a huge deal with a monthly subscription pet products company, and the treats can be found in 500 retail stores.

SIT, STAY, EAT KALE! Ratner says he and his son owe the success to Phelps, which manufactures dog treats for private labels and, to a lesser degree, its own brands. Phelps, however, hasn’t always had the capabilities to provide such a variety of custom treats.

Three years ago, Wafra Partners LLC took a majority interest in Phelps, the private equity firm’s first controlling acquisition in the pet sector. The company, based in Wakefield, Massachussetts, has a 50-year history. At the time it was acquired, it was solidly profitable, with about $13 million in annual revenue, according to previous CEO and owner Vincent Foley, who still holds a small stake.

“CUSTOMERS ARE CLAMORING FOR NEW IDEAS AND PRODUCTS, EVEN NEW PACKAGING.” Ryan Wierck Managing Director, Wafra Partners

Wafra does not disclose price details on acquisitions, but the firm’s news release from January 2015 about the deal states that it can invest up to $30 million of equity per transaction.

As one of the oldest names in the pet treats business, Phelps presented a good opportunity, Wafra executives say, but it needed some new tricks. A major market shift toward healthy pet treats made of foods more likely to show up on a family’s dinner table was just kicking in.

“Customers are clamoring for new ideas and products, even new packaging,” says Ryan Wierck, the managing director at Wafra who led the acquisition. “We found that this company that we had acquired had a very good base of customers and products, and it was something we could build off of very quickly.”

Photo by Steve Puppe

Wafra went on to invest well over $1 million in 2015 in manufacturing equipment to be able to process “betterfor-you” ingredients in pet treats, according to Phelps CEO Daniel Trott. He says the company has “stepped on the gas pedal” since he took over in January last year. He was recruited by Wafra due to his strong background in consumer brands, including a long stint at PepsiCo. “They needed a transformation from traditional treats into the fast-paced industry of better-for-your-pet treats,” Trott adds. “We are following exactly the health and wellness trends in the consumer space for humans.”

The paleo diet treats are one example; in addition, the company regularly creates combinations using blueberries, flaxseed and pomegranate (Phelps even manufactures a brand of treats called “Pawmegranate”). All kinds of “proteins”—meats and fish—can be used, even exotic meats like wild boar or water buffalo.

“WE ARE FOLLOWING EXACTLY THE HEALTH AND WELLNESS TRENDS IN THE CONSUMER SPACE FOR HUMANS.” Daniel Trott CEO, Phelps Industries

BRAND IDENTITY // Tedd Ellis, vice president of marketing and sales.

“We’re selling to retailers salmon and kale treats, something you might be preparing at home for your family,” Trott says. “Whatever you think of as better for you, there are pet treats being developed as counterparts.”

And just as important as the manufacturing capability is the knowhow on the manufacturing processes that years of experience bring.

“Most everything we do is a custom formula—it’s really getting in and trying to understand what the customer is trying to accomplish, what the brand is and what claims they want to make,” says Tedd Ellis, vice president of marketing and sales for Phelps.

Stories like Ratner’s are the kind that Phelps Industries likes to tell.

“I would say we are much more collaborative and much more willing to take on entrepreneurs,” he adds. “They will be on the leading edge of what is coming into the market.”

ROOM FOR GROWTH Although the market is mature, it’s currently in the midst of a growth spurt. Wafra executives admit they had been looking for an investment in the pet industry for some time. They saw the industry as primed for growth and expected the pet treat market in particular to benefit from what some call the “humanization” of pets.

Most of the executives are themselves pet owners (Ellis claims the industry attracts “a certain type”) and were enthusiastic about the business.

Their dogs are happy to test treats, and the execs will tell you which ones their pets like best. Overall, Americans spent about $60 billion on their pets in 2015, according to the American Pet Products Association, including $23 billion on food. Of that, Trott says $3.5 billion to $3.7 billion was spent on treats.

Phelps has existed in one form or another since 1966, when it produced rawhide bones (no power fruit included). The previous owners, who still hold 10 percent of the company, repurchased its Rockford, Illinois, manufacturing facility from food giant Nestle in 1990. Foley, the previous CEO, was in charge until January 2015 when he retired.

“I was 67 in 2012, and we decided that was long enough to work,” Foley says. Still, even after Wafra made the majority acquisition, he stayed on and nearly doubled the revenue before he turned over the reins to Trott.

FOUR-LEGGED ‘CHILDREN’ In addition to the healthy food factor, the sheer number of Americans with pets is increasing. Trott says baby boomers are emptying their households of children and replacing them with pets, while millennials are adopting pets for a “trial run” before having children.

Over the past 10 years, he says the share of U.S. homes with pets has jumped to 65 percent from 56 percent. A lot of those new pets are dogs—the percentage of homes with dogs is now 44 percent compared with 36 percent a decade ago.

“The overall pet ownership rates rising, coupled with this health and wellness trend—this is a dramatic shift,” Trott says.

And Phelps’ research shows the company continues to benefit from a dramatic preference among American pet owners for U.S.-origin pet food and treats, a strength for Phelps. A scare in 2013 over tainted dog treats from China gave Phelps a 15 percent boost that year, Foley says.

Phelps has been in the market for major acquisitions, to offer more treat shapes, for example. The best sellers are still the traditional “Pup-Peroni” stick or “Beggin’ Strips” type treats, but the possibilities are endless, with new technologies for making soft biscuits, even meatballs, Trott says.

“We are looking to add to what we call the treat platter so we can go to customers with a broad treat offering, including jerky, soft-moist, freeze-dried, biscuits, whole muscle, etc.,” adds Jeffrey Gerson, a managing director with Wafra who also worked on the Phelps deal.

Photo by Steve Puppe

“THE OVERALL PET OWNERSHIP RATES RISING, COUPLED WITH THIS HEALTH AND WELLNESS TREND—THIS IS A DRAMATIC SHIFT.” Daniel Trott CEO, Phelps Industries

TALKING TREATS // Trott and Ellis collaborate in the Rockford plant.

While Phelps continues to look for acquisitions with the financial support of Wafra, it just signed its first-ever joint venture. It’s partnering with a large meat-processing company to provide freeze-dried components— which Trott says are a major growth driver in the overall pet food category.

The venture, Eighteen Below, is expected to be operational in March.

With Eighteen Below, Phelps may even enter the general pet food market, a much larger space than treats, by supplying specialty freezedried additives.

WAFRA HOLDS STEADY Wierck says Phelps’ revenues have risen at a healthy 15 to 25 percent annual pace each year since the acquisition, all organically. The overall pet category, meanwhile, is growing at about 4 to 5 percent annually.

Going forward, Trott expects revenue to continue to get a boost from all business segments. He foresees a 10 to 15 percent increase in Phelps’ annual sales to existing customers in the healthy treat space; with more customers, which the company expects to add, he anticipates consistent growth in the mid-to-high teens. With acquisitions of additional treat

offerings, like biscuits or soft bites, “we can get significantly above that,” Trott says.

Trott and Foley, neither of whom had experience with private equity firms, say that working with Wafra has been positive. They both use words like “supportive” and “helpful” to describe the firm and its partners. Wierck, Gerson and their colleague, Senior Managing Director Peter Petrillo, sit on Phelps’ board, but all parties agree they don’t meddle in everyday affairs.

There are big plans for Phelps as it continues to expand and introduce new offerings to a mature but dynamic market. Because the company is backed by private equity, those plans include an exit strategy.

“We target a five- to six-year hold,” Wierck says. “But we have flexibility to build up companies appropriately, at the right pace, and then exit when it makes the most sense.” // Susan Nadeau is a business writer who splits her time between Hartford, Wisconsin, and Thessaloniki, Greece.

In the Real-World Game of

Cybersecurity The Best Defense Is a Good Offense

BY S.A. SWANSON

T

he past year has generated some big headlines about data breaches— all with large companies on the losing end. But that doesn’t mean smaller firms have escaped hackers’ attention. The number of attacks reported by midsize companies (those with revenue of $100 million to $1 billion) increased 64 percent from 2013 to 2014, according to a survey PwC conducted with CIO and CSO magazines. For midsize U.S. organizations, the estimated average financial losses for detected incidents totaled $1.8 million per company.

“When I talk with senior people in government, they say they’re more worried about the small and midsize companies, because the big guys are spending more money on cybersecurity,” says David Burg, PwC’s global and U.S. advisory cybersecurity leader. Attackers will want to spend time where they’re more likely to have a higher rate of return, he says.

With relatively small staffs managing large sums of money, middle-market private equity firms easily fall into that category. “There are very attractive targets, like limited partners, who might be ultrahigh net worth individuals. (Cybercriminals) may want to go after that person or their family office to make fraudulent financial transactions,” says Dave Dalva, vice president of security science for digital risk management firm Stroz Friedberg. “It’s a dichotomy, in the sense that you have a smaller company with high-impact information. But they often have relatively immature security programs.”

To defend against security risks, firms need to focus on the interconnected systems that pervade business interactions. That flow of information creates a cybersecurity ecosystem that encompasses not just the private equity firm, but also how it’s linked to portfolio companies, service providers and even social media. Says Burg: “The reality is, every single business operates by managing information and data, and you have to think about where that data travels to really understand the ecosystem implications.”

CRITICAL DATA: IDENTIFYING ‘WHAT’ AND ‘WHERE’ To create a secure ecosystem, companies must address two fundamental questions: What information is most critical, and where does it reside? Cybersecurity experts have plenty of stories to demonstrate how often those questions are overlooked.

“I saw a situation where someone on the distribution list for the firm’s deal strategy forwarded the email to an employee who didn’t need that information,” Dalva says.

“And some of the key people in the firm were then a little concerned that the deal strategy, which is probably the most sensitive strategic document in the firm, is being sent around with very limited controls.” At many firms, Dalva has seen a lack of understanding about what qualifies as sensitive information and who should access it. Employers should clarify that as part of their security policy and ensure all employees know about it, he says.

Firms also need to think broadly about what represents sensitive information in their ecosystem. “This is where a lot of private equity firms get tripped up, because folks tend to think about risk related to credit card or social security data,” says Jim Ambrosini, a managing director with CohnReznick Advisory Group, where he leads the firm’s cybersecurity and technology consulting practice. “There is an incorrect belief that if we don’t have this type of data, we are probably less likely to be targeted and attacked.”

Cybersecurity programs often aren’t aligned with industry risks because firms treat cybersecurity as an IT issue.

That’s the wrong approach, Ambrosini says. “Cybersecurity is not an IT thing,” he adds. “It’s a business risk decision, and it requires a business strategy to deal with it.” The CFO and other managing partners are in the best position to identify what information is most valuable, he says, and to ask the IT team what’s being done to protect that data.

“WHEN I TALK WITH SENIOR PEOPLE IN GOVERNMENT, THEY SAY THEY’RE MORE WORRIED ABOUT THE SMALL AND MIDSIZE COMPANIES, BECAUSE THE BIG GUYS ARE SPENDING MORE MONEY ON CYBERSECURITY.” David Burg Global and U.S. Advisory Cybersecurity Leader, PwC

Often, firms aren’t fully aware of where their critical data resides. At PwC, Burg’s team has seen this happen repeatedly with clients. “We’ll find companies that have a new piece of IT infrastructure, and for the sake of performance testing, real data is put in there, and it may not be adequately protected,” Burg says.

When it comes to controlling the location of sensitive data, the ubiquity of cloud computing can pose significant problems. “It’s very cheap and easy to put data into the cloud,” says Jerry Pender, who worked at the FBI for almost 13 years, including three years as chief information officer. “Any employee with $100 and a credit card can put gigabytes of data into a cloud service. And it can be very difficult to keep track of that.”

To minimize the risk of employees going rogue, Pender suggests educating them about what information is most sensitive, what they’re allowed to do with it, and the potential consequences of ignoring company policies. “If people aren’t aware of what’s important, they’re going to make mistakes,” says Pender, who now focuses on information technology and cybersecurity as managing director and operating partner at Z Capital Partners.

When tracking the flow of critical data, firms also need to carefully assess their vendors’ access, which can represent a security weak spot. That was the case in Target’s high-profile data breach—hackers entered the system after infecting the retailer’s HVAC vendor. Most private equity firms probably haven’t protected themselves against the vulnerabilities that could emerge if vendors are hacked, Ambrosini says. “Begin with some good questions. Any time a vendor is accessing systems and data, someone should be asking: Who is accessing it, what do they have access to, what do they need it for, who is controlling it, and how are vendors protecting that data?”

LACK OF CYBERDILIGENCE When middle-market private equity firms conduct due diligence for potential investments, cyberrisk usually isn’t a consideration. “They’re looking at financial information, but they’re not looking at it from the standpoint of enterprise risk,” Ambrosini says. That’s shortsighted, because a breach at a portfolio company can create both financial and reputational damage for the firm.

Dalva of Stroz Friedberg has developed an assessment of cybersecurity risk at potential portfolio companies—he says large PE firms have used the service, but not smaller ones. “I like to call it cyberdiligence,” he says, noting the process involves speaking with the principals and technical staff of the company, and directly observing the company’s infrastructure. Dalva’s team recently conducted cyberdiligence for a large PE firm and found a couple of vulnerabilities at one portfolio company. “The PE firm is making sure the company addresses that as a condition for investment,” Dalva says.

Israel Martinez, president and CEO of cybersecurity firm Axon Global, says he’s seen data that suggest at least 20 percent of the companies being acquired have already had their intellectual property stolen by hackers. Before investing in a company, he recommends hiring a firm to research whether that company has already been compromised. “I would say 80 percent of (private equity) decision-makers are not thinking about it,” he says. “But even when they are made aware of it, they’re under the false belief that insurance would cover them later if there was an issue where there was nondisclosure about a breach.”

DON’T TAKE THE BAIT Social media creates security challenges too. That’s because the information posted on LinkedIn, Facebook, Twitter and elsewhere can help hackers create effective spear-phishing campaigns. Spear-phishing represents the most common method of targeted cyberattacks and uses carefully crafted emails that trick employees into clicking on links or attachments that infect their computers.

By gleaning personal details about their targets, hackers can boost the success rate for their social engineering. “Let’s say I’m on Facebook and I post about my kid who plays soccer at a particular school,” Dalva says. “If I’m the CFO at a private equity firm, the bad guys can send an email saying, ‘Hi, my son is on the same soccer team. Thought you’d enjoy this photo of the boys.’” That’s a terrific spear-phishing tactic, says Dalva. “I guarantee the recipient is going to open that attachment.”

Hackers mine social media to determine who has access to critical data and who’s connected to them. Martinez recalls one CFO who protected himself well from cyberthreats—until the hackers decided to target his daughter. “The daughter was on Facebook—they sent a spear-phishing email to her, and she unknowingly became infected with malware,” says Martinez, who is also a senior adviser to the president and CEO of ACG Global and the Kogod Cybersecurity Governance Center at American University. Through the daughter, the hackers were able to infect the CFO’s computer and obtain passwords to steal a considerable amount of money, he says.

To address social media concerns, some executives decide not to create profiles on LinkedIn or other networks. But that creates more problems than it solves, Martinez says. “If you do that, you don’t own your identify in that space—and you give someone else the ability to create a version of you,” he says. He’s seen hackers create fake profiles of prominent executives and infect all the people who become connections.

Experts say the best defense against spear-phishing entails creating a culture of awareness, and that requires training. In December, Z Capital Partners conducted a mandatory training session on spam and email phishing. The firm also plans to send fake phishing emails to employees to gauge their awareness level and will follow up with additional training if needed, Pender says.

Ambrosini echoes the need for better user awareness, particularly since hackers have become more efficient. Phishing campaigns once required significant technical skill and could take weeks to set up correctly, he says. Today, thanks to easily accessible toolkits, hackers can create a phishing campaign in about 15 minutes. “The cost and time has gone down and the success rate has gone up,” Ambrosini says.

Years ago, hackers took a brute-force approach to break through firewalls—but now they realize there’s no patch for human nature or human ignorance, he says. “There should be a lot more user education around these common hacking tactics and how to identify a malicious email,” he adds.

“User awareness may be the last line of defense between your company getting hacked or not.”

EMBRACE THE BASICS Sometimes firms create vulnerabilities by overlooking IT basics. Ambrosini recalls an “oh my gosh” moment for one client that seemed to have a robust security framework. “They had all the latest and greatest things, except they forgot to do one important thing—which was change the default credentials for the firewall,” he says. Based on the login screen, Ambrosini’s team could tell the client had a Cisco firewall.

They obtained full access by using Cisco default credentials (in this case, “cisco” for the username and password). Hackers easily could have done the same. What’s more, the client should have configured the firewall to be accessible internally. Instead, it was accessible from the Internet. That means anyone, anywhere could have attempted to log in, Ambrosini says, adding: “A lot of security risk comes down to basics.”

“USER AWARENESS MAY BE THE LAST LINE OF DEFENSE BETWEEN YOUR COMPANY GETTING HACKED OR NOT.” Jim Ambrosini Managing Director, CohnReznick Advisory Group

With the Federal Trade Commission and other regulators paying closer attention to cybersecurity policies, those basics have become even more vital. Says Martinez: “Look through the lens of, if today you’re compromised, what will you wish you had done to protect your valuation and protect yourself from liability?” To that end, he recommends several actions that can help reduce risk:

“IF TODAY YOU’RE COMPROMISED, WHAT WILL YOU WISH YOU HAD DONE TO PROTECT YOUR VALUATION AND PROTECT YOURSELF FROM LIABILITY?” Israel Martinez President and CEO, Axon Global, and Senior Cybersecurity Adviser to the President and CEO of ACG Global

•• Begin implementing a simple version of the National Institute of Standards and Technology Cybersecurity Framework. “This framework has been accepted by the Department of Homeland Security, Fortune 500 companies and others,” he says. “It’s a good plan, but it’s also a defensible plan from a liability standpoint.”

•• Adopt the five principles for enterprise cyberrisk management that the National Association of Corporate Directors recommends. “It is about creating awareness and accepting at a board level that cyber is an enterprise risk management issue more than a technology issue,” Martinez says.

•• Download the Sans Institute Top 20 CIS Critical Security Controls at Sans.org. “This is the recommended set of actions for cyberdefense that provides specific ways to stop today’s most pervasive and dangerous attacks,” he says.

HAVE A RESPONSE PLAN

“YOUR PREPARATION FOR DEALING WITH (AN INCIDENT) IS GOING TO AFFECT HOW BAD THE BREACH IS.” Dave Dalva VP of Security Science, Stroz Friedberg

Although a strong cybersecurity program is crucial, it’s just as important to assume those efforts will fail—meaning, have an incident response plan in place. “Your preparation for dealing with (an incident) is going to affect how bad the breach is,” Dalva says. That includes who needs to be involved in decision-making, who needs to be involved in notification and communication, when to bring in law enforcement, and how to communicate with limited partners.

When firms try to improvise a response after a breach, it can make the damage worse. “Communication may be inefficient, you might be saying the wrong things to the wrong people, and it’s going to hurt you,” he adds.

Dalva runs tabletop exercises with his clients by creating an attack simulation. “We follow the incident response plan, and we always learn things,” he says. “The PE guys really appreciate the complexity of dealing with the aftermath.” // S.A. Swanson is a business writer based in the Chicago area who frequently writes about technology.

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QUICK TAKES AARON EASTERLY // CEO, Rover.com

Rover.com Sniffs out Market for Personalized Pet Care

R

over.com, a 4-year-old startup backed by venture capital, is betting its online technology can build a market in the burgeoning area of pet care services.

Among the biggest hurdles for dog owners is finding trust-

worthy caretakers, says CEO Aaron Easterly. He contends many pet parents simply don’t trust the level of care provided by commercial services such as kennels.

Rover, which matches pets with individuals willing to care for the animals in their own home, is aiming to bridge the gap. Easterly, him-

BIO // Prior to joining Rover.com, Aaron Easterly served as the general manager of network strategy and monetization within Microsoft’s Advertiser and Publisher Solutions group. Before joining Microsoft in 2008, he was vice president and general manager of Atlas Publisher, a unit of aQuantive Inc. He began his career in digital marketing in 1999 with media agency Avenue A as a data analyst after graduating with honors from Harvard.

self a longtime dog owner, never entrusted his pooch to commercial care; his struggles to persuade friends and family to pick up the slack when he left town were part of the impetus for the business.

“The kennel and boarding market is a pretty big market, but I bet I’m not alone,” Easterly recalls thinking. “I bet I’m not the only dog owner in the world who refuses to even look at that industry.”

Research proved him right. Easterly, a former Microsoft executive, found that more than 90 percent of owners were reluctant to use kennels; if they could be convinced to try a more personalized form of service, this so-called shadow market could potentially grow to more than $85 billion from an estimated $8 billion currently.

So Rover developed an online platform that matches pre-vetted (no pun intended) caretakers with individuals seeking in-home boarding, house sitting, walking and related services for their four-legged family members. Easterly and his co-founders built a prototype and launched the business in their home market of Seattle in December 2011.

Today Rover serves some 10,000 cities across the United States, helped by word-of-mouth referrals and social media. It has online competition from Santa Monica, California-based DogVacay.com, which also has VC backing.

Continued on next page

QUICK TAKES AARON EASTERLY // CEO, Rover.com

“IT’S GENERALLY WHAT YOU WOULD EXPECT IN THE SENSE THAT IT’S CHEAPER THAN THE KENNEL, TYPICALLY VERY DRAMATICALLY.” Aaron Easterly CEO, Rover.com

Rover handles everything from screening potential caretakers (only 20 to 30 percent are approved) to scheduling and payments. Caretakers set their own prices and Rover typically takes a fee of 15 percent. Money is put in a trust account and released only after the job is completed.

Not unlike ride-sharing service Uber, reviews work both ways: Caretakers have the ability to review dogs and cats for their behavior.

“It’s generally what you would expect in the sense that it’s cheaper than the kennel, typically very dramatically,” Easterly says.

Most of the nearly $50 million Rover has raised—from investors that include Menlo Ventures, Technology Crossover Ventures and retailer Petco, among others—has been deployed toward technology and customer service, says Easterly, whose staff has grown to about 120 employees.

He won’t provide specifics but says sales have tripled year over year.

“It’s a decent-sized business and is still growing at a really good clip,” Easterly says. “We don’t see a reason why it couldn’t be a public company at some point.” // —DLC

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A QUALIFIED OPINION CAROL FRANK // Managing Director, MHT MidSpan

BIO //

P

rior to joining middle-market bank MHT MidSpan, Carol Frank worked on deals exclusive to the pet industry, including the sale of Cloud Star to Frontenac and the acquisition of Zeus Pet Products by Pet Food Experts. She also founded and operated four highly successful pet-related companies. Frank is a regular contributor to the American Pet Products Association e-update and the APPA Professional Women’s Network newsletter. She sits on the board of more than a dozen nonprofit and business organizations, including the Pet Industry Distributors Association and The Pet Care Trust. She began her career as an accountant with Ernst & Young.

“WHILE BABY BOOMERS HAVE DRIVEN THE INDUSTRY’S SIGNIFICANT GROWTH OVER THE LAST 25 YEARS, THE MILLENNIAL GENERATION HAS TAKEN OVER.”

WHAT IS THE OUTLOOK FOR GROWTH IN THE PET PRODUCTS AND SERVICES INDUSTRY?

T

he outlook for growth in both pet products and services remains very optimistic; Packaged Facts projects the industry will grow to $87 billion by 2018 from $71 billion in 2013. While baby boomers have driven the industry’s significant growth over the last 25 years, the millennial generation has taken over. These younger consumers are more likely to view their pets as children and therefore spend premium dollars on food, treats and services.

Because this industry is full of passionate people, there is no shortage of inventors and entrepreneurs who are constantly introducing the proverbial “better mousetrap” in terms of technology, toys, collars/leashes, food, treats, etc.

For example, I’m working with a client who is introducing a revolutionary new pet treat/food this spring, based on a very well-known ingredient that no one has thought to put into such a product until now. To date, he has invested well over $250,000 in this project because he is so convinced it will be a complete market disrupter. Plus, he just loves his dogs and wants what’s best for them.

A QUALIFIED OPINION CAROL FRANK // Managing Director, MHT MidSpan

I

WHAT CHANGES IN CONSUMER BEHAVIOR ARE CONTRIBUTING TO OPPORTUNITIES IN THIS MARKET?

’ll never forget a speech I heard at Global Pet Expo a few years ago by renowned veterinarian and ABC News contributor Dr. Marty Becker. Dr. Becker explained that once upon a time, dogs lived in the barn. Over the last 50 years, they moved into the backyard, onto the front porch, into the house, and are now sleeping in bed with their owners. I call it the “barn-to-the-bed concept” and cite it frequently when talking to clients and investors about why our industry continues to be so robust.

In fact, 83 percent of pet owners now view their pets as family members. This attitude has led to the meteoric rise of premium products that mimic trends in the human market, such as natural, organic and made-in-the-USA. None of these trends leads to products that are less expensive than their alternative. Premium equals more expensive.

WHERE DO YOU SEE THE MOST OPPORTUNITY?

P

roducts that appeal to the tech-savvy millennials will drive the most change over the next five to 10 years.

This category is still in its infancy, but I see a tremendous opportunity for entrepreneurs who can take advantage of our desire to integrate technology into our responsibilities as pet owners at a price that will appeal to the masses.

Almost every week I hear from someone who is working on the latest and greatest in wearable technology. From Whistle/ Tagg to Voyce to WÜF (just to name a few), whoever figures out how to create a simple, reasonable, functional and stylish wearable product will win a very profitable race.

One reason to jump into this race: Technology-based pet companies command significantly higher valuation multiples than non-tech products. In many cases, five to 10 times higher.

“TECHNOLOGY-BASED PET COMPANIES COMMAND SIGNIFICANTLY HIGHER VALUATION MULTIPLES THAN NON-TECH PRODUCTS.”

A QUALIFIED OPINION CAROL FRANK // Managing Director, MHT MidSpan

WHAT KINDS OF VALUATIONS ARE YOU SEEING FOR DEALS IN THIS SECTOR?

W

hen I talk to my M&A clients about valuation, I like to use the analogy of a three-legged stool. If a company exhibits the qualities demonstrated by all three legs, they will likely command a premium multiple. The legs are: 1. Strong gross margins (typically over 45 percent).

2. Double-digit revenue growth for at least the past three years.

3. Strong brand—the more recognizable the brand, the higher the premium.

Generally speaking, a consumable company with decent margins, but a less-than-desirable brand or growth, would be valued at six to eight times EBITDA, while a hard-goods company with the same profile would be valued at between four and seven times EBITDA. A non-consumable company (toys, collars, leashes, bowls, etc.) that exhibits one or two legs would trade in the range of five to eight times EBITDA, and a consumable company with these attributes (think Zuke’s, Merrick, Cloud Star) can command double-digit multiples. These multiples are for dog- and cat-oriented companies; other pet categories would likely transact at slightly lower multiples.

CAN YOU TALK ABOUT A RECENT DEAL YOU’VE BEEN INVOLVED IN?

I

am currently working with a branded pet food company that is poised to sell in the first quarter of 2016 for an extremely attractive valuation. Why? Because the owners have taken advantage of the all-natural, pure, betterfor-you trend that I mentioned earlier. They are also in an extremely hot category—raw/frozen/freeze-dried—that has been growing like weeds over the last few years.

In addition, they’ve used social media to their great advantage, amassing thousands of Facebook users who love to write glowing reports about the company’s product online. Their customers are loyal, and their product isn’t cheap. All this adds up to a rapidly growing, profitable company with a strong brand. In other words, it has all three legs of the stool and will realize a very nice exit because of the owners’ passion, vision and hard work. //

I N T E R G R O W T H 2 0 1 6 K E Y N O T E L U N C H E O N P R E S E N TAT I O N

F RO M H A L TO N OW

T H E

F U T U R E

O F

A I ,

R O B O T I C S

A N D

B I O T E C H

Forget “2001: A Space Odyssey”–the future is more jaw-dropping and thought provoking than you can possibly imagine. Two leading futurists from Singularity University, a Silicon Valley think tank with founders from Google and the X PRIZE Foundation, will explore the latest technology breakthroughs and their impact on various industries including your investment strategies.

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#INTERGROWTH © 2016 Association for Corporate Growth. All Rights Reserved.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

TORONTO ORANGE COUNTY

NEW YORK CHINA

TAP CITIES TO NAVIGATE TO ARTICLE

ACG NEW YORK

Pitch Perfect: ACG New York’s Deal Tank Returns ACG New York in December hosted its third annual Deal Tank competition, inspired by the ABC reality television series “Shark Tank.”

Executives from three early-stage companies pitched their businesses to a panel of seasoned judges, simulating the real-world process of approaching private equity investors.

Digital advertising platform Pricing Engine was named the winner.

The other finalists, chosen from a pool of applicants to participate in the live event, included ClaimFox, a solution for handling insurance claims requests, and TripleLift, a native advertising service. Each company worked with a coach before presenting in front of a live audience of middle-market professionals.

The Deal Tank judges included Geoff Teillon of Pouschine Cook Capital Management; Paul Wigdor of Ascendant Advisors; Tom Shattan of Shattan Mendel Enterprises; Michael Pfeffer of Post Capital; Tom Gesky of past Deal Tank winner Resourcive; and “Tank Master” Scott Estill of Skillcapital, who helped moderate the judging panel. //

READ ONLINE // Learn about other ACG events on the MMG website.

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG CHINA

Fraud in China—War Stories from the Trenches Senior members of China’s leadership continue to aggressively fight corruption within the Communist Party and at companies both public and private. This campaign has left investors and multinationals operating in China vulnerable.

ACG China hosted a seminar on Dec. 15 titled “Fraud in China—War Stories from the Trenches,” featuring Paul Peterson, a forensic accountant and investigator with extensive experience working with multinational companies on fraud matters in China.

Peterson, a director at Grant Thornton China, discussed the Communist Party’s anticorruption campaign, including how the initiative impacts the private equity industry and how to mitigate risk when investing in mainland China. He illustrated China’s fraud environment with stories about investigating various types of fraud in the country.

Peterson stressed the importance of due diligence, strong internal controls and proper oversight to avoid running afoul of anti-corruption rules.

“Compliance departments must stay in touch with current fraud trends and get the word out to employees about ethics and company expectations related to staff behavior,” he told a crowd of senior executives and ACG China members at the House of Roosevelt on the Bund, a Shanghai event venue. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG TORONTO

Speaker Lineup Draws Record Attendance More than 600 attendees descended on Toronto for the local chapter’s 13th annual ACG Capital Connection®. The record-breaking attendance was due in part to the conference’s all-star lineup of more than 40 speakers from a wide range of industries.

“Overall, the feedback was that the conference had robust content and diversity in themes and speakers, representing excellent value for delegates, exhibitors and sponsors alike,” said conference chair Daniel Simunac, a managing director and principal officer at investment bank Raymond James.

Joshua Harris, co-founder of private equity firm Apollo Global Management, delivered the morning keynote presentation. His firm, one of the largest private equity funds in the world, has recently been active in Canada.

Other featured speakers included Rossann Williams, president of Starbucks Canada; Dani Reiss, CEO of Canada Goose, a maker of extreme weather outerwear backed by PE firm Bain Capital; and Mitch Joel, president of global digital agency Mirum.

The conference drew business owners, senior executives and investment professionals, along with approximately 60 exhibitors and 30 sponsoring companies. This year’s ACG Toronto Capital Connection will be held Nov. 15-16, 2016 at the Allstream Centre. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG ORANGE COUNTY

Private Equity Night Offers Insight Into Middle-Market M&A Middle-market professionals eager to discuss the outlook for M&A in 2016 came together on Jan. 12 for ACG Orange County’s 14th annual Private Equity Night.

Held at the St. Regis Resort in Monarch Beach, California, the wine tasting event presented a prime opportunity for networking while showcasing private equity firms that operate in the region.

In addition to Southern California-based professionals, the event drew attendees from cities across the country—including Seattle, Boston, New York and Dallas, giving participants a variety of perspectives on the state of middle-market M&A and regional deal flow.

Private equity firms, investment bankers, attorneys, lenders, business owners, chief financial officers, chief executive officers and commercial bankers were represented.

ACG Orange County organizers noted a marked increase in attendance since they began hosting Private Equity Night over a decade ago.

“We started the event in 2002, with just over 50 attendees and eight private equity sponsor tables,” recalled Gerik Degner, event chair and partner at Alpine Pacific Capital. This year, more than 650 attended and the chapter sold all 50 private equity sponsor tables. “The growth is extraordinary,” Degner added. //

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE

ACG Global Announces Chapter of the Year Winners ACG Global in January announced the winners of its Chapter of the Year award, which recognizes excellence among the association’s local chapters.

ACG Minnesota, ACG Detroit and ACG Raleigh Durham were each named winners in their respective categories, determined by membership size. Meanwhile, ACG Minnesota’s chapter executive, Nicki Vincent, was honored with the ACG President’s Award for Excellence and Achievement by a Chapter Executive.

“An ACG Chapter of the Year exemplifies not only keen business acumen, but also an eye for innovation and unwavering support of ACG’s ongoing public policy efforts and mission of Driving Middle-Market Growth,” said Richard Jaffe, ACG Global chairman of the board and partner at Duane Morris LLP. A press release noted several of the achievements of each chapter.

ACG Minnesota, which was awarded in the large-chapter category, experienced a 17 percent increase in membership in its 2015 fiscal year alone; in 2014, the chapter was honored with an innovation award for the creation of its Bold Awards program.

Continued on next page

ACG@WORK CHAPTER NEWS FROM AROUND THE GLOBE ACG Detroit, the winner in the midsize segment, has steadily grown membership each year since its founding in 1984 and has demonstrated strong retention. The chapter actively participates in ACG’s public policy efforts and contributes to the Middle-Market Voice initiative.

ACG Raleigh Durham—a Chapter of the Year honoree in 2011—was recognized in the small membership category. It has won two ACG innovation awards, in 2013 and 2015, and has the third-highest retention rate of all ACG chapters.

The Chapter of the Year award is given to chapters based on scoring in three areas: self-assessment, benchmark performance metrics and engagement with the wider ACG community.

ACG Minnesota’s Nicki Vincent received the 2016 President’s Award in honor of her dedication to the organization and her service as a mentor and adviser to other chapter executives. Vincent has been with the chapter for more than 20 years. //

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THE PORTFOLIO INSIGHT FROM THE EXPERTS

MID-MARKET TRENDS

SOUND DECISIONS

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IN THIS ISSUE MID-MARKET TRENDS Pet food and treats businesses must adhere to a particular set of regulatory and compliance requirements that private equity firms should be aware of as they continue to invest in the booming sector.

SOUND DECISIONS Thinking outside the box when it comes to benefits can help employers attract new employees and retain the ones they have. Think paid volunteer hours, employee assistance programs—even Take Your Dog to Work Day.

COMING SOON Check out the Portfolio section of the May/June issue for more on the latest middle-market trends, written exclusively by our team of expert ACG Global featured firms. To learn more about contributing to this section, please contact Maggie Endres, (312) 957-4257.

These articles are brought to you by ACG’s Global Partners.

THE PORTFOLIO MID-MARKET TRENDS // Jennifer Frankenberg, Director, TriVista

MID-MARKET TRENDS

SOUND DECISIONS

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Pet Food Safety: What Private Equity Investors Need to Know

O

PE investors should monitor food safety in portfolio companies from the time of purchase through the exit.

ver the last 10 years, private equity investment activity in the petfood and treats sector has increased substantially, particularly in the middle market. According to industry specialists, consumable pet products are commanding double-digit EBITDA multiples and 20 to 30 percent more than hard goods such as pet toys and bedding. However, as private equity investors increase their activity, the risk profile of these investments may also rise. Pet food and treats come with unique compliance and regulatory requirements not encountered in traditional manufacturing and distribution environments, particularly those associated with food safety.

Food Safety Due Diligence

management’s commitment to food safety

When investing in pet food, not unlike

and compliance, and verify the implementa-

investing in human food, conducting food

tion of industry best practices.

safety due diligence is critical. In the fall

Determining early on whether or not a

of 2015, the Food and Drug Administration

target company is compliant with FDA regu-

published two final rules as part of its imple-

lations is critical to mitigating downside

mentation of the Food Safety Modernization

risk. While no facility is ever deemed “per-

Act, or FSMA; the first outlines enhanced

fect,” it is important that investors consider

controls for human food, and the second

gaps in target companies’ food safety pro-

establishes safety controls for animal food.

grams and understand the potential liabil-

Investors should be aware of the regulatory

ity and probability of an FDA shutdown or

environment when considering investments

product recall—either of which could dra-

in the sector.

matically impact an investment.

In addition to conducting a Quality of Op-

Mapping out a post-close risk mitigation

erations due diligence-type assessment, food

and improvement plan that can be shared

safety experts recommend administering an

with the management team will ensure

independent review of the target company’s

timely closure of critical corrective actions

food safety and compliance programs to en-

and show management the investors’ com-

sure adherence to internal programs, assess

mitment to food safety and compliance.

THE PORTFOLIO MID-MARKET TRENDS // Jennifer Frankenberg, Director, TriVista

MID-MARKET TRENDS

SOUND DECISIONS

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Jennifer Frankenberg

Post-Transaction Oversight

Food Safety at Exit

PE investors should also monitor adher-

The final consideration for private equity

ence to food safety and compliance pro-

investors in the pet food sector is the

grams post-close. Similar to the human food

impact food safety can have on the exit pro-

industry, an outbreak in the pet food indus-

cess. Going forward, FSMA and regulatory

try can damage a brand extremely fast. To

compliance will continue to attract atten-

protect both pets and their human caretak-

tion from prospective buyers. Investing in

ers, management of food safety programs

the right resources during an investment

should be regularly scrutinized, especially

holding period should net tangible results

with respect to FSMA regulation.

for investors. While it’s difficult to esti-

Investors should regularly request up-

mate the net positive impact of a robust

dates on program development and adher-

food safety program on enterprise value,

ence, and ask third parties to verify compli-

strategic acquirers and professional inves-

ance and conduct on-site gap assessments.

tors alike should find comfort in knowing

Investors must empower management

their concerns have been addressed and

teams to invest time, money and resources

that a program is in place to tackle every

into food safety infrastructure, which may

element of food safety. This alone should

require capital expenditures. Food safety

contribute to a faster deal process, higher

is a constantly evolving field that needs to

likelihood of close and potentially higher

be probed regularly to ensure effective-

exit multiples. //

ness. Staying ahead of the curve will guarantee that risks are mitigated and that

As director of food, beverage and consum-

the organization is adequately positioned

ables, Jennifer Frankenberg brings TriVista

to prevent recalls, minimize outbreaks and

clients a strong combination of food safety,

avoid other costly regulatory and compli-

supply chain, operations and risk manage-

ance issues.

ment experience in the food and consumables space. Her expertise ranges from collaborating with regulatory agencies on issues such as recall activities and foodborne illness investigations to performing plant inspections.

THE PORTFOLIO SOUND DECISIONS // Michelle Mikesell, Managing Director, Insperity

MID-MARKET TRENDS

SOUND DECISIONS

TAP BUTTONS TO NAVIGATE COLUMNS

The Right Perks Can Help Attract and Retain Good Employees

P

Out-of-thebox perks can attract good employees and keep them around.

icture your office with bowls of water available at all times and regular bathroom breaks. Oh, you already have that? What if you added the pitter-patter of four feet? Now we’re talking.

How many of us would love to have our four-legged friends join us at work? If that’s not doable, what about just once a year for Take Your Dog to Work Day? It’s this kind of thinking outside the benefits-box that can make a difference to prospective employees—and help keep the ones you already have.

Go Beyond the Basics

can have a huge impact. Potential employ-

If you’re looking for ways to attract and

ees who are community-minded will likely

retain the best employees, you should try to

give your company greater consideration

go beyond the basics on benefits. In indus-

when they see that giving back is impor-

tries where job candidates have their choice

tant to you too.

of top places to work, it’s often the perks that woo them and keep them around.

While it may be hard for you to compete

Flexibility If a sabbatical or unlimited paid time off

with the largest companies—which have

isn’t in the cards, you can still find a way

been known to offer elite perks, such as

to sweeten the deal. More and more, it’s be-

nap pods, on-site doctors and dry cleaners,

coming a regular practice to let employees

free chef-prepared meals or weeks-long

spend a percentage of their time working

sabbaticals—there are some things you

remotely. If that’s not feasible, what about

can offer to set you apart.

putting a focus on work-life balance? Make it a point to assure your employees that

Paid Volunteer Hours

special life events—an anniversary, child’s

Giving your employees time off, even just a

performance or family gathering—are im-

few hours a month, to make a difference in

portant and shouldn’t be missed.

the communities where they work and live

THE PORTFOLIO SOUND DECISIONS // Michelle Mikesell, Managing Director, Insperity

MID-MARKET TRENDS

SOUND DECISIONS

TAP BUTTONS TO NAVIGATE COLUMNS

Michelle Mikesell

Employee Assistance Program

Medical Benefits

An EAP is a counseling and consultation

You probably won’t have an on-site doctor,

service that provides support and re-

but offering competitive, affordable health

sources to help employees, whether they’re

care benefits can set you apart. With the

dealing with a crisis or need resources for

Affordable Care Act, it’s more important

medical needs, child care or legal issues.

than ever that you classify and count your employees correctly and offer them the ap-

Company Culture by Design

propriate coverage options. Keeping these

A good company culture starts at the top,

costs in check, for you and your employees,

and you can’t just talk a good game. You

is essential.

have to be intentional about it and walk the talk. How do your employees feel about

Where to Begin?

working at your company? If they’re not

So, you think what you’re offering is pretty

engaged, good luck trying to hire others

good, right? But are you sure?

who are. Even if you’re fortunate enough

While it’s true that what appeals to one

to find an “ace,” he’s not going to stick

person may not appeal to another, there are

around long if the culture is dismal.

some things within industries or parts of the country that are considered standard.

Performance-Based Bonus

First, find out what the status quo is

Bonuses, raises and other incentive pro-

for your industry or workforce. If you’re

grams should support your company’s

not yet at that level, find out what you can

goals. A raise based on time or tenure

do to get there. Now, how can you go a bit

breeds discontent among those top-per-

beyond that?

forming employees you’re trying to retain.

Ask your top employees for input. Find

When bonuses are paid to your perform-

out what they think is lacking, within rea-

ers, it motivates them to strive higher.

son, and what they feel would stand out to job-seekers.

THE PORTFOLIO SOUND DECISIONS // Michelle Mikesell, Managing Director, Insperity

MID-MARKET TRENDS

SOUND DECISIONS

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As a middle-market company, your current and potential employees are looking for something that sets you apart from the

How Take Your Dog to Work Day Can Benefit Your Company

pack. Whether it’s a free gym membership or a dog-friendly atmosphere, once you find out what’s important to your workforce, you’ll have a better idea of what perks you can offer to retain employees and attract other high performers. // Michelle Mikesell is managing director, midmarket consulting and development, for Insperity. She helps companies know who they are, who they need to be and how to align their human capital for business success. She has been instrumental in developing business alignment diagnostic tools and customized services plans for middle-market clients.

••Employees see you care about the role pets play in their lives.

••Lower levels of stress hormones are produced with pets around.

••Dogs at work help increase interaction between co-workers.

••Volunteer opportunity: Use the day to plan a fundraiser for a local animal shelter.

Source: Pet Sitters International

Above: The author’s dog, 11-year-old Macy, is a yellow Labrador retriever.

To find out more about how Insperity can help grow your business, please visit insperity.com/acg.

Find your ideal candidate without sorting through hundreds that aren’t.

Post your job opening today jobsource.acg.org

B-SIDE KEVIN FICK // CEO, Worldwise

GET ENGAGED… “A lot of people will say a bored pet or a pet that hasn’t been exercised can be a bad pet—it’s like they have too much time on their hands. We work on products that engage the pet.”

KEVIN FICK // After more than a decade working in the pet industry, Fick in 2012 became CEO of Worldwise, a California-based manufacturer of eco-friendly pet products. Under Fick’s leadership and with backing from Mistral Equity Partners, Worldwise has capitalized on the thriving pet sector, growing organically and through acquisitions with an eye toward international expansion.

UNCONDITIONAL LOVE...

“The thing I love about the pet industry is that it’s an emotional sell. This is all about pet parents wanting the very best for their four-legged, two-legged, what have you, ‘children.’”

INELASTIC DEMAND… “Even in tough times, people will cut other corners, but when it comes to their pets, they typically don’t change the food or treats they feed them, or the level of toy purchases.”

FAT CATS… “One of the biggest things that people are concerned about is obesity, and getting pets off the couch or their pet bed, wherever they are, and getting them active.”

“WITH MILLENNIALS, ECO, GREEN AND SUSTAINABLE IS A BASELINE EXPECTATION, NOT A ‘PLUS.’” COMPANY APPEAL… “The thing I’ve always admired about Worldwise is the company was founded on the premise that you ought to be able to make ecosustainable products that perform as well or better than the alternatives.”

“INTERNATIONAL EXPANSION IS KIND OF A WIDE-OPEN GREENFIELD OPPORTUNITY FOR US.” GREEN IDEA… “Worldwise was the first to figure out that you can take empty plastic water bottles, clean them and shred them into a fine fiber, and use that to stuff the inside of pet beds.”

THE LADDER ACG MEMBERS ON THE MOVE

James Brendel

James Brendel, a member

David DiPaolo has joined

of ACG Denver, was named

Star Mountain Capital, a New

managing partner of Hein &

York City-based alternative

Associates LLP. A 28-year

asset manager focused on

veteran of the firm, Brendel

small and midsize businesses,

assumes his new national role

David DiPaolo

as a managing director and

after serving most recently as

investment committee member.

Denver office managing partner.

DiPaolo brings more than 20

Under Brendel’s leadership,

years of principal investment and

Hein will maintain its focus

corporate advisory experience in

on providing audit, tax and

the lower middle market, along

business advisory services to

with relationships with business

public and private companies,

owners and referral sources,

notably within five growing and

which will further enhance Star

complex industries: energy,

Mountain’s direct origination and

manufacturing and distribution,

underwriting capabilities.

private equity, real estate and Kevin Nowak, a member of ACG

construction, and technology.

Chicago, has joined TCF Capital Kevin Bader, a member of

Funding, the Chicago-based

ACG Cleveland, has joined

cash flow and asset-based

MCM Capital Partners as

lending division of TCF National

business development officer Kevin Bader

Kevin Nowak

Bank, as senior vice president.

to source new investment

He brings extensive lending

opportunities, foster and develop

experience and lower middle-

relationships in the intermediary

market relationships to TCF.

community, and work with portfolio companies to identify

Ken Kavanaugh, a member of

prospective strategic add-on

ACG Boston, joined boutique

acquisitions. Bader serves as

executive search firm Westport

ACG Cleveland’s vice president

Intl. as managing director to

of membership and co-founded

lead the firm’s private equity

the chapter’s Young ACG group,

Ken Kavanaugh

practice and serve mid-cap

one of the first formed in the

and Fortune 1000 companies in

ACG community.

the manufacturing, consumer products, financial services and diversified industrials sectors.

THE LADDER ACG MEMBERS ON THE MOVE

David Logan

David Logan was named

U.S. LBM Holdings, a

partner and financial services

collection of building material

industry tax practice leader by

distributors with locations

CohnReznick LLP, an accounting,

in 28 states, has acquired

tax and advisory firm. Logan

Florence, Alabama-based

brings more than 30 years

Darby Doors, a manufacturing

of tax and business advisory

and sales organization whose

experience in financial services

specialization includes doors,

and expertise in the investment

millwork and hardware. The deal

management industry.

expands the capabilities and customer base of U.S. LBM,

C.W. Downer & Co., a global

which MMG profiled in its

investment bank serving middle-

April 2013 issue.

market clients, announced a merger with N+1, a European

Silver Oak Services Partners,

investment banking, asset

a Chicago-area lower middle-

management and investment

market private equity firm, has

firm focused on the middle

sold its equity interest in Direct

market. The merger will combine

Travel to ABRY Partners, a

the firms’ significant European

Boston-based private equity

operations and provide N+1 entry

firm. Direct Travel, profiled in

to the U.S. market. Together,

the July/August 2015 issue of

N+1 and C.W. Downer will offer a

MMG, provides outsourced

team of 240 investment banking

corporate travel management

professionals across 14 offices in

and booking services.

13 countries.

To submit your promotions, job changes and other accomplishments, please send details and a high-resolution color photo to Associate Editor Kathryn Mulligan at kmulligan@acg.org.

IT’S THE SMALL THINGS PET INDUSTRY TRENDS // It’s a Dog-Eat-Dog World

1

PET HEALTH INSURANCE? GET IT RIGHT MEOW!

5

A TAIL OF TWO BIG DOGS IN PET RETAIL

6

While Labradors remain the No. 1 dog breed in all but one state, designer dogs are on the rise. For instance, there’s been an 11% increase in labradoodles in the United States between 2014 and 2015.

The first pet insurance policy was written by Claes Virgin in 1890 in Sweden. Fast-forward to 2014—the American pet insurance market had become a $622 million business and continues to grow.

2

The Petco-PetSmart merger may have stalled for good. Petco’s private equity owners—TPG Capital LP and Leonard Green & Partners LP—are still hoping to unload Petco for $5 billion. In 2014, private equity firm BC Partners bought PetSmart for $8.7 billion.

3

4

‘THERE GOES BOOMER!’

While baby boomers are currently the bedrock of the pet retail industry, the youngest of the generation will turn 65 in 2029. As a result, retailers must learn to reposition their offerings for the millennial consumer.

WITH DOG BREEDING, ANYTHING IS PAWSIBLE

PE BARKING UP THE RIGHT TREE

Purchase price multiples for consumable pet product businesses, such as food, average in the double-digit range of earnings, while companies that produce hard goods, such as pet toys, tend to command multiples of seven to eight times EBITDA.

7

FAT CATS IMPACTING THE PET INDUSTRY

The Association for Pet Obesity Prevention found that 52.6% of dogs and 57.6% of cats are overweight or obese in the United States.

The impact will be felt in veterinary care and pet food choices.

PET SPENDING HAS BUSINESSES WAGGING THEIR TAILS

The pet industry has grown to $58 billion in size; today more than 56% of households own a dog while over 45% own a cat.

—Larry Guthrie, director, communications and marketing, ACG Global

C RAC K IN G T H E C O MP L IANCE CO DE Become a Member of ACG’s Private Equity Regulatory Task Force

ACG’s Private Equity Regulatory Task Force (PERT) gathers together CFOs, CCOs and in-house legal counsel of middlemarket private equity firms nationwide. Together, they interpret and navigate the often complex compliance and regulatory issues affecting the industry. As a member of PERT, your firm will join a national network focused on shaping compliance best practices alongside federal regulators.

CONTACT US For more information on joining PERT today, contact Amber Landis, VP of Public Policy, at alandis@acg.org.

© 2016 Association for Corporate Growth. All Rights Reserved.

THE LEADERSHIP ACG DIRECTORS ACG BOARD OF DIRECTORS //

CHAPTER REPRESENTATIVE DIRECTORS //

DIRECTORS AT LARGE //

Chairman Richard Jaffe* Duane Morris LLP ACG Philadelphia Term expires 8/31/2016

Brent Baxter Clayton Capital Partners ACG St. Louis Term expires 8/31/2017

Jason Byrd Charter Capital Partners ACG Western Michigan Term expires 8/31/2017

Robert Brighton Shutts & Bowen LLP ACG South Florida Term expires 8/31/2017

Ramsey Goodrich Carter Morse & Mathias ACG Connecticut Term expires 8/31/2016

Steve Castino Vestal & Wiler CPAs ACG Orlando Term expires 8/31/2018

Mark Hollis Centerfield Capital Partners ACG Indiana Term expires 8/31/2016

Karen Grexa KeyBank Business Capital ACG New Jersey Term expires 8/31/2017

Jay Jester Audax Group ACG Boston Term expires 8/31/2018

Jay Hansen O2 Investment Partners ACG Detroit Term expires 8/31/2017

Scott Linch Dixon Hughes Goodman ACG Charlotte Term expires 8/31/2018

Karin Kovacic Alcentra Capital ACG Connecticut Term expires 8/31/2018

Don Lipari McGladrey ACG New York Term expires 8/31/2017

Mark Lehman Parsons Behle & Latimer ACG Utah Term expires 8/31/2018

Cassandra Mott Thompson & Knight LLP ACG Houston Term expires 8/31/2016

Mike McVey Hylant Group ACG Columbus Term expires 8/31/2018

Martin Okner SHM Corporate Navigators ACG New York Term expires 8/31/2018

Walter O’Haire Valuation Research ACG San Francisco Term expires 8/31/2017

Gretchen Perkins Huron Capital Partners ACG Detroit Term expires 8/31/2016

Titus Schurink HPE Growth Capital ACG Holland Term expires 8/31/2018

Karen Tuleta Morgenthaler ACG Cleveland Term expires 8/31/2017

Mitch Woolery Kutak Rock LLP ACG Kansas City Term expires 8/31/2018

Thomas Turmell TMT Capital Partners LLC ACG Chicago Term expires 8/31/2018

Vice Chairman Jason Brown* Victory Park Capital ACG Los Angeles Term expires 8/31/2016 President & Chief Executive Officer Gary A. LaBranche, FASAE, CAE* ACG Global Chairman of Finance Angie MacPhee* RGL Forensics ACG Denver Term expires 8/31/2016 Secretary J.B. Dollison* Crutchfield Capital Corporation ACG Houston Term expires 8/31/2016 Immediate Past Chairman Doug Tatum* Newport Board Group ACG Atlanta Term expires 8/31/2016

ACG HONORARY DIRECTORS // Robert G. Coffey Alan B. Gelband *denotes member of Executive Committee

ACG NEAR YOU ACG CHAPTERS ACG 101 Corridor acg.org/101

ACG Edmonton acg.org/edmonton

ACG Orlando acg.org/orlando

ACG Arizona acg.org/arizona

ACG France acg.org/paris

ACG Philadelphia acg.org/philadelphia

ACG Atlanta acg.org/atlanta

ACG Germany acg.org/germany

ACG Pittsburgh acg.org/pittsburgh

ACG Austria acg.org/austria

ACG Holland acg.org/holland

ACG Portland acg.org/portland

ACG Barcelona acg.org/barcelona

ACG Houston acg.org/houston

ACG Raleigh Durham acg.org/raleighdurham

ACG Boston acgboston.org

ACG Hong Kong acg.org/hongkong

ACG Richmond acg.org/richmond

ACG Brasil acg.org/brazil

ACG Indiana acg.org/indiana

ACG San Diego acg.org/sandiego

ACG British Columbia acg.org/bc

ACG Kansas City acg.org/kc

ACG San Francisco acg.org/sanfrancisco

ACG Calgary acg.org/calgary

ACG Kentucky acg.org/kentucky

ACG Seattle acg.org/seattle

ACG Central Texas acg.org/centraltexas

ACG Los Angeles acgla.org

ACG Silicon Valley acg.org/sv

ACG Charlotte acg.org/charlotte

ACG Louisiana acg.org/louisiana

ACG South Florida acg.org/southflorida

ACG Chicago acgchicago.com

ACG Madrid acg.org/madrid

ACG St. Louis acg.org/stlouis

ACG China acg.org/china

ACG Maryland acg.org/maryland

ACG Tampa Bay acg.org/tampabay

ACG Cincinnati acg.org/cincinnati

ACG Minnesota acg.org/minnesota

ACG Tennessee acg.org/tennessee

ACG Cleveland acg.org/cleveland

ACG National Capital acgcapital.org

ACG Toronto acg.org/toronto

ACG Columbus acg.org/columbus

ACG Nebraska acg.org/nebraska

ACG UK acg.org/uk

ACG Connecticut acg.org/connecticut

ACG New Jersey acg.org/newjersey

ACG Utah acg.org/utah

ACG Dallas/Fort Worth acg.org/dfw

ACG New York acg.org/nyc

ACG Western Michigan acg.org/wmich

ACG Denver acg.org/denver

ACG North Florida acg.org/northflorida

ACG Wisconsin acg.org/wisconsin

ACG Detroit acg.org/detroit

ACG Orange County acg.org/occ